European M&A: Stick to your knitting

Author: | Published: 1 Dec 2006
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Europe is now the main driver of the global M&A market. And the performance of one firm shows how the international ambitions of the elite US firms are changing.

The business model is built on teams. Specifically, teams in the world's top financial centres that are big enough to handle big cross border projects, but small enough to concentrate on the firms' core business. It is a model that certainly differs from the global domination of UK international firms; but Skadden Arps Slate Meagher & Flom's organisation and strategy are also distinct from its top-tier New York rivals.

"The top investment banks are not present in every city in Europe but rather the key financial centres," says Scott Simpson, a US-qualified partner in Skadden's London office. "Our approach is very similar."

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Investment in European space and lawyers contrasts with the other elite New York M&A firms; on the whole, these firms staff their European offices with US lawyers. Skadden's approach is not unique – Latham & Watkins, Shearman & Sterling and Cleary Gottlieb are also recognized for their investment in the best European M&A lawyers. (And these firms are hiring even more international lawyers.) But Skadden is arguably the most successful. As one partner at a UK magic circle firm says: "Skadden Arps is superb on cross-border European deals; it is rightly ranked as the leading US firm in Europe."

Skadden is the only first tier US M&A firm to also be ranked in the top two tiers in the UK and France for M&A advice. Standout M&A instructions for the firm include advising Arcelor, on its bid from Mittal; Banco Comercial Português, in its unsolicited acquisition of Banco BPI; and the financial advisers to Endesa, on its bid from E.ON. Skadden is also representing the Nasdaq stock market in its bid for the London Stock Exchange.

The planning for Skadden's present M&A practice began in 1990. Says Simpson: "We aimed to build a team focussed on high-end cross-border work, through a combination of US partners and the finest domestic guys from the main jurisdictions. We think this has created a well positioned global practice." Simpson says that the firm sought to emulate the way in which US investment banks had organized themselves in Europe.

"The leading US investment banks are populated by people who include some of the best European talent," says Clive Wells, banking partner at Skadden London, who moved over from Allen & Overy in April 2006. "The global head of M&A at one of these banks could be Portuguese, French or Italian; it doesn't matter because they have the right people on the ground in Europe, who know the local markets but, importantly, are integrated with the best guys in the US. To an extent we try to emulate that model, to combine excellence across the major European markets with the benefits of a fully integrated network of Skadden offices in the US and worldwide."

"It is not about having offices in every relevant jurisdiction," says Simpson. "In fact, it is about not having offices in every relevant jurisdiction. Instead, you have to have a creditable presence in the international financial centres and the main jurisdictions – UK, France and Germany. One seamless unit is what you must strive for."

The rule on expansion, according to a Skadden type model, is that you do not open an office unless convinced it will operate at the top end of the market. Otherwise, the risk is that profitability in the partnership will be uneven, preventing the development of a collegiate culture – seen as vital to an integrated practice.

The Skadden model (sometimes referred to as the global boutique) also dictates that mid-market M&A deals are referred to other firms. But the firm needs the client to feel confident about going elsewhere; Skadden has established referral links with firms in Europe. "Clients appreciate this sort of referral and take comfort from knowing that Skadden will recommend a good firm and an individual lawyer who is a leader in his or her field in the particular area of law and particular jurisdiction," says Wells. The referral network is informal and non-exclusive, but Skadden maintains an alliance arrangement with Chiomenti in Italy.

The alternative is to go native: establish lots of offices all over the world, which do a variety of legal work alongside your core acquisitions practice. The approach is described by one M&A partner in London as "dots on the map and bums on seats".

The problem is that so-called global domination leads to the firm attempting to be the best at everything, everywhere. This is unrealistic: a firm cannot hire the best person in every practice, in every jurisdiction. Often the best lawyers in Europe are independently minded; they will not want to join your firm and will end up on the other side on your deal.

Others say that the debate about international strategy ignores the fundamentals: US firms have access to a big domestic market, which European firms do not have. US law firms therefore do not have the same impetus to grow, and can afford to be more selective in their approach to international expansion. Different models demand a different approach to expansion, say lawyers, and there is no one-size fits-all approach.

Lawyers are tight lipped when it comes to the firms having problems with integrating practice steams across jurisdictions; but most concede it is easier to provide an integrated effort when you grow your practice organically, rather than through mergers.

Latitude wanted

Deals have certainly become more complex over the past 12 months. The involvement of different types of M&A players (hedge funds, private equity and infrastructure funds) coupled with the return of strategic buyers, demands a more flexible approach by deal lawyers. "The legal and regulatory maze is getting more complicated, particularly given the growth in cross-border transactions," says Clifford Chance partner David Pudge. "You cannot simply take national rules off the shelf and apply them to your deal." The basic deal management skills are the same says Pudge, but there is now a greater onus on the application of those skills to cross-border work.

"Flexibility and an awareness of how the client wants to operate are vitally important," says Allen & Overy corporate partner Alan Paul. Paul says that these abilities are immediately apparent in how a lawyer addresses the issues: "Lawyers must offer solutions tailored to the approach and position of their clients. Confidence, experience and resources all vary, depending on who you are acting for. If I was a buyer, I would expect my lawyer not just to be technically proficient, but to be able to tell me how the seller is going to behave, and how to tailor my own behaviour."

M&A values have been high this year thanks to congenial economic conditions: steady interest rates, strong earnings, high business confidence and low rates of corporate default. This may not always be the case, with some in the market already detecting evidence of a slow down and forecasting some big defaults next year.

The argument against that is that the global market is now more balanced, less dependent on the US economy (US domestic M&A now represents under 40% of global volume). Some are predicting that financial institutions will pick up from where the energy sector left off, and produce some big cross-border deals in Europe next year. Furthermore, oil money that would previously have been invested in the US is now being channelled into Europe due, in part, to Sarbanes-Oxley.

The flight of capital from the US to Europe has not dampened the performance of US M&A practices. The top European firms are keener than ever on US merger partners. But even the most profitable European firms will struggle to make this objective a viable proposition for the elite US operations such as Skadden. DA